Thursday, November 19, 2009

Cash for Clunkers: a Real Clunker for our Cash

The government hailed the Cash for Clunkers program as "a wild success." But the final verdict on the program's economic and environmental achievements is less sanguine: it did little for the environment and less for Detroit. It did manage to spend a whole lot of taxpayer money to help some people buy new cars -many which were going to buy one anyway.

The cars purchased through the program were, in fact, more efficient, averaging 9mpg better than the cars traded in. But the environmental impact, if any, was minimal. For though 690,000 cars were purchased through the program, we currently have over 254 million registered vehicles in America. What is the net impact of increasing by 9 mpg the efficiency of less than one third of one percent of our nation's vehicles?

"According to Hudson Institute economist Irwin Stelzer, at best 'the reduction in gasoline consumption will cut our oil consumption by 0.2 percent per year, or less than a single day's gasoline use.'" (http://online.wsj.com/article/SB10001424052748703628304574453280766443704.html ) And that assessment fails to take into consideration the environmental impact and energy expenditure of building the new car and destroying the old one.

The program was ostensibly designed to shore up our Detroit car makers. It would have helped the ailing "Big Three" if people would have actually bought their cars -but most did not. Many actually took this opportunity to trade in their old Detroit cars for ones with Japanese nameplates. The top 10 trade-ins were Fords, Chevys, Jeeps, and Dodges, while the top 10 cars purchased were Toyotas, Hondas, Nissans, Hyundais, and two Fords. It should have been expected that GM and Chrysler would do poorly, given their strengths have traditionally been in the SUV/pickup truck market. But the government, after spending $50 billion to purchase 60% of GM, and another $6-7 billion to aid Chrysler, still decided to spend $3 billion in a program that preferentially subsidized the purchase of Toyotas, Hondas, and Nissans... True, many of these Japanese cars were built in America. But the Japanese transplants are not the ones bleeding thousands of jobs as they teeter on the brink of bankruptcy. So though some American auto workers benefited (temporarily) from the program, it was not those most in danger of losing their jobs.

The program will not have a lasting economic impact, as it mostly did not generate "new" car purchases, but instead shifted future sales to out present. From the WSJ: "U.S. automakers reported that new car sales for September, the first month since the clunker program expired, sank by 25% from a year earlier. Sales at GM and Chrysler fell by 45% and 42%, respectively. Ford was down about 5%. ...[The Cash for Clunkers participants] got $4,500 to buy a new car they would probably have purchased anyway, so all the program seems to have done is steal those sales from the future." The White House insists this justifies the program, as it boosted the economy at a time when it needed it most. But think about that: the government spent $3 billion to get people to buy cars during the summer instead of later in the year.

An analysis by Edmunds.com is even more scathing ( http://money.cnn.com/2009/10/28/autos/clunkers_analysis/index.htm ):

"A total of 690,000 new vehicles were sold under the Cash for Clunkers program last summer, but only 125,000 of those were vehicles that would not have been sold anyway.... That means the government ended up spending about $24,000 each for those 125,000 additional vehicle sales."

"It is unfortunate that Edmunds.com has had nothing but negative things to say about a wildly successful program," retorted the DOT. In the end, the program is estimated to have had a net cost of $1.4 billion in taxpayer money, with little to show for. Another "wildly successful" program like this, and we'll all go broke!

To make matters worse, the government borrowed money to cover the program, implying that -after adding years of interest payments- the total cost of the program will actually be much higher. "So to keep a somewhat higher number of auto workers busy during the summer, we will be paying China for years and years to come. ....A more accurate name for the program would have been 'Cash for China.' " (NH Union Leader, http://unionleader.com/article.aspx?headline=Cash+for+whom%3f+Clunkers+program+a+lemon&articleId=ad83721c-0a1a-4579-b41d-20f50c7bd2ef )

What was the government thinking? Unfortunately, Cash for Clunkers is not the exception, but the rule among this Administration's domestic policies. Like Obama's payroll tax credit, extended even to those with no federal income tax liabilities (which implies removing Medicare/Social Security funds without removing these individuals' benefits), and Obama's proposal to add a Social Security cost of living payout increase (even though there has been no cost of living increase this year), the Cash for Clunkers program entails boosting our economy by handing out money for the masses to spend, even if it means raising taxes or borrowing more from foreigners first. They are the logical conclusion of an illogical economic policy, whereby we truly are expected to spend our way into prosperity. Apparently, some in this Administration actually believed Joe Biden when he said, "We have to go spend money to keep from going bankrupt."

Of note, many of those receiving the money are among the 47% of Americans who paid no federal income tax. Hence, this is not taxpayer money "returned," it is wealth transferred. Perhaps Joe Biden should have said, "We have to go spend other people's money to keep from going bankrupt." In that, Cash for Clunkers was a success. But wealth redistribution is no substitute for wealth creation. A snake cannot grow fat by eating its tail.

Fueling our recovery with higher debt and higher taxes will eventually stifle investment and choke our economy. When nobody wants to lend us money, and there are no more rich people to tax, where will we get the money after that? Therein lies the problem with socialist policies. As Margaret Thatcher once said, "The problem with Socialism, is that eventually you run out of other people's money!"